Addi: Since K failed to give you an answer with regards to 4Q, I will. You have several issues that hurt LSI short term. These include the uncertainty over any potential recovery in the semi market, the opening of the Gresham fab, the uncertainty of the Symbios purchase, the overall deterioration in the market as evidenced by the AD line, which is reminiscent of August '87, and the failure of LSI to deliver on its bright future in the past three years.
Let's take a look at these issues. The semi market has now had its worst quarter since summer 1990, and it is in its longest sustained downturn in 40 years. Yet over the next ten years, it is unlikely that any other major industry will see the sustained growth that semis will see. It is reasonable to expect at least an average of 15% annual growth over the next ten years. Some years will exceed that figure, while other years will see less growth. As a consequence the semi market does go through some boom and bust cycles. Currently, it is the trough, and as a result we see a great deal of disinvestment in future fab projects by SEA. You tell me what you will see first--a modest recovery in SEA or billion dollar fabs going up in SEA. The answer is clear. The current downturn in SEA will provide the impetus for explosive growth in a company like LSI simply because there will be much less real and perceived competition coming from SEA fabs within the next two years. And remember, these things don't just come mail order. Given the current climate of disinvestment, it will be at least another three years before significant investment is made by SEA in fabs. Thus, while SEA may hurt short-term, the long term prospects of this downturn are actually very positive. Do I see a recovery in SEA? Not currently, but what I do see is a market with enormous growth potential, particularly in China, and yesterday's announcement is the sort of thing one can expect to see for a long time. But there is another area of the world, where we haven't heard much about--Eastern Europe. The potential for growth there is enormous. You have an aggregate base of one quarter billion highly educated people who are growing networks, using wireless communication, playing video games, and requiring large scale storage. This represents an enormous opportunity for future business expansion in general. Thus, I don't see anything that will disturb the long term growth of the semi industry. Ask yourself, do you expect a repeat of the last three years for the next three years? K does. I don't.
Let's talk about LSI specifically. Over the past eight years, LSI has had an excellent performance to date. It has appreciated over 300% during that time period, so as a long-term investor such as you can appreciate, it has done very well. But as someone, such as yourself is painfully aware, it has performed poorly during the past three years to say the least. Why? First let's consider R&D. If LSI had kept its R&D stable for the past three years, it would still be showing a profit of $1.75 a share, which is what its earnings were in 1995. So the primary reason for the decline in earnings has been increased R&D. But consider what that R&D is about to earn. What are the cutting edge consumer products? DCAM and DVD. Who has the largest percentage of DVD decoders among independent chip manufacturers? LSI. DCAM? Call your local Comp USA. I have. Sales staff at my local Comp USAs are constantly getting calls about the Casio camera that still hasn't been released yet in the US. The thing is selling like hotcakes in Japan--yeah that's the same Japan that is in a recession. How about networking? LSI's networking segment is growing despite the downturn in the semi industry. The area epitomizes the superior position that LSI has carved out for itself. It has moved from a commodity chip maker to a less commodity like company, and now it is rapidly moving into more complicated coreware products and out of gate array products. In short it is moving into the area of intellectual property which augers well for more stable long term relationships with their customers. Make no mistake about it, intellectual property provides the highest of multiples in a market--see Microsoft. What percentage of their business now falls into this sort of intellectual property category? Currently over 30 percent, and it will grow. Notwithstanding K's assertions, high end storage is not even midway through its next major growth cycle. LSI's purchase of Symbios was a masterstroke here. Symbios SCSI expertise puts LSI right up to the box, and allows them to offer a much fuller range of high end storage products to compliment their Fibre Channel offerings. And let's not forget the fire sale price LSI paid for this baby. 1.2 times sales. As best as I can tell, the Symbios margins are similar to LSI's, yet LSI is currently selling for better than 2 times sales. I know, K has criticized LSI claims that it has 80% of the design wins in Fibre Channel. For example he took the time to attack Mr. Corrigan's credibilty when Q-Logic just posted a blow-out quarter. K used his expertise to cite Q-Logics blow-out quarter as evidence that LSI didn't have that strong a prescence in Fibre Channel. What a complete dope. Q-Logic is the best proxy play on LSI's Fibre Channel there is. Now you can belive K or you can believe the IR department in Q-Logic and Mr. Corrigan. A lot has been made of Playstation II. Now with the purchase of Symbios, Playstatiion accounts for less than 6% of LSI's revenues, and probably even less profits. But no one can assume that the loss of Playstation II MPU is fait accompli. That Gresham white elephant that K keeps harping about? It has state of the art facilities, which will allow LSI to offer cutting edge technology in terms of cost and performance. In the semi game, you either invest in fabs or you fall. Perhaps K would rather see LSI become dependent upon foundries in Taiwan to provide its products.
But you have probably heard of these potential great stories, and you want to know what has happened to your stock in the past three years. First, you initially invested in LSI at the wrong time. Your investment in LSI in '95 was the equivilant of the guy who now jumps into Dell at 115 and expects to quadruple his money in the next two years. It isn't going to happen. When you invested in LSI in 1995, it had generated spectacular returns--better than most it not all of the other great success stories of 1992 to 1995. Take a look at the chart below. In a three year period between fall of 1992 and fall 1995, LSI appreciated nearly 1500%
www3.techstocks.com
The only better play was my neighbor US Robotics. What happened between now and then. First was the aforementioned R&D increase. Second, we have had a dramatic drop in the semi industry during the past three years. Third, the new product cycles that are about to pay off have just begun. Fourth, not only was there a downturn in the semi market, but many semi customers changed their ordering pattern to something similar to just-in-time inventory. This represented a long-term change from previous practices of keeping excess inventroy on hand. Currently there is no excess inventory, and that provides a base from which companies such as LSI can grow. Fifth, you bought LSI in 95 based upon its promise as a System on a Chip company. It's a compelling thought, but still not a reality. Thus, LSI is still very early in its growth cycle. The real question you need to ask yourself today is where do you want to have your hard earned money? Or where do you want to put your new money? I ask myself that question all the time. I can walk away from LSI in a heartbeat. But quite frankly, I just don't see that much better of an investment on the horizon for the next two or even three years as LSI. It's that simple.
I would also caution you to skeptical of K's expertise. I have researched his posts, and I find that he has lost a huge amount of money on another semi stock--IDTI, and if you believe his posts, he has just taken a loss on LSI. So he hardly has a record of which one can boast. I also consider him to be more than a little pimple of a man for calling people like Wilfred Corrigan and Diana Mately liars. I have posted a number of his posts where he had contradicted himself, and I will continue to do so, since it is apparent that he had an agenda that goes beyond being bearish on LSI. I suspect he genuinely wishes to hurt the company because of some past slight.
What you need to do is not divest of LSI right now, because that would mean that you made two mistakes-buying at the high end of the cycle and selling at the low end. (Of course, you could be an ultra dope like K who invested early in a terrible compnay like IDTI, and is now short LSI as of yesterday) You are still on the learning curve as we all are. When it comes to investing we never reach quiessence. You need to wait out the next two years and make a determination as to when the peak of the next cycle has been reached. Or you can put LSI in your back pocket and hold for the much longer future.
Now let's look at 4Q. According to Bloomberg, Corrigan predicted a higher 4Q. According to Corrigan, Corigan predicted a higher 4Q. According to K, Corigan did not. How much is the new fab going to cost LSI? In the absent of any usage of the fab, about $.05 a share or $16 million in 4Q. By 4Q in '99 it will end at $25 million per quarter. But the question is what do you do when your capacity exceeds 90 percent, and you have spectacular growth in all three of your business groups occurring next year. God help LSI if it didn't have the fab coming on line. The irony is that LSI is lucky that there was a decline in the overall semi market this year because by '99 they would have been capacity constrained without the new fab.
Are we in a bear market market? Unless you are in large caps, we have been in a bear market for quite some time. Follow Peter Lynch's model which says that the first group that comes out of a bear market is the semis? Why? Future product growth. And here you have not only future product growth but the likely coincidence of new product growth in all of LSI's major market segments in 1999. And here we have disinvestment from a number of LSI's potential competitors. This is a superior investment at today's prices. The irony is that your new one will have no idea how much you had to sweat through this baby before you took your profits. |
